Last year, for the first time, more patent applications were filed in China than in the United States. This surge reflects China’s increasing intellectual property maturity and growing pains, according to U.S. Intellectual property lawyers and experts.

Worldwide patent filings exceeded the 2 million mark, with 2.14 million filed last year. That’s a 7.8 percent boost over the 1.99 million applications filed in 2010.

“Sustained growth in IP filings indicates that companies continue to innovate despite weak economic conditions. This is good news, as it lays the foundation for the world economy to generate growth and prosperity in the future,” said WIPO director general Francis Gurry at a press conference in Geneva.

The numbers reflect a boost in innovation by Chinese nationals, said Stuart Meyer, an intellectual property partner at Fenwick & West in Mountain View, Calif. It’s not just U.S. inventors wanting to get protection in China because it’s commercially important, he said. “That’s a real sea change.”

Ultimately, such filing shifts could affect U.S. patent policy, which offers great protections for intellectual property producers, he said.

The balance is shifting a little bit because more U.S. companies are dealing with licensing intellectual property owned by foreign patentees, said Meyer. “We’re the ones that don’t need such rigorous protection because we’re on the other side of the coin. It changes the way we’re going to be thinking about this in the coming decades.”

The numbers are a milestone in the way innovation is distributed around the world, said Q. Todd Dickinson, executive director of the American Intellectual Property Law Association. “Clearly china is in growth mode in terms of research and development and patent filings track that closely.”

He also said China’s intellectual property system is maturing. “Clearly they’re using IP to protect indigenous innovation.”

The filings show that everyone wants to do business in China, but China also needs to improve patent enforcement, said Peter Toren, a partner at Weisbrod Matteis & Copley in Washington.

“I’ll be more impressed when I get the real sense that China is enforcing patent rights…I want to see them allowing companies to really enforce the rights they have,” Toren said.

Dynamic domestic players and focused multinationals are helping China churn out a growing number of innovative products and services. Intensifying competition lies ahead; here’s a road map for navigating it.

MCKINSEY QUARTERLY FEBRUARY 2012 • Gordon Orr and Erik Roth

China is innovating. Some of its achievements are visible: a doubling of the global percentage of patents granted to Chinese inventors since 2005, for example, and the growing role of Chinese companies in the wind- and solar-power industries. Other developments—such as advances by local companies in domestically oriented consumer electronics, instant messaging, and online gaming—may well be escaping the notice of executives who aren’t on the ground in China.

As innovation gains steam there, the stakes are rising for domestic and multinational companies alike. Prowess in innovation will not only become an increasingly important differentiator inside China but should also yield ideas and products that become serious competitors on the international stage.

Chinese companies and multinationals bring different strengths and weaknesses to this competition. The Chinese have traditionally had a bias toward innovation through commercialization—they are more comfortable than many Western companies are with putting a new product or service into the market quickly and improving its performance through subsequent generations. It is common for products to launch in a fraction of the time that it would take in more developed markets. While the quality of these early versions may be variable, subsequent ones improve rapidly.1

Chinese companies also benefit from their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competitiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence.

But progress isn’t uniform across industries, and innovation capabilities vary significantly: several basic skills are at best nascent within a typical Chinese enterprise. Pain points include an absence of advanced techniques for understanding—analytically, not just intuitively—what customers really want, corporate cultures that don’t support risk taking, and a scarcity of the sort of internal collaboration that’s essential for developing new ideas.

Multinationals are far stronger in these areas but face other challenges, such as high attrition among talented Chinese nationals that can slow efforts to create local innovation centers. Indeed, the contrasting capabilities of domestic and multinational players, along with the still-unsettled state of intellectual-property protection (see sidebar, “Improving the patent process”), create the potential for topsy-turvy competition, creative partnerships, and rapid change. This article seeks to lay out the current landscape for would-be innovators and to describe some of the priorities for domestic and multinational companies that hope to thrive in it.

China’s innovation landscape

Considerable innovation is occurring in China in both the business-to-consumer and business-to-business sectors. Although breakthroughs in either space generally go unrecognized by the broader global public, many multinational B2B competitors are acutely aware of the innovative strides the Chinese are making in sectors such as communications equipment and alternative energy. Interestingly, even as multinationals struggle to cope with Chinese innovation in some areas, they seem to be holding their own in others.

The business-to-consumer visibility gap

When European and US consumers think about what China makes, they reflexively turn to basic items such as textiles and toys, not necessarily the most innovative products and rarely associated with brand names.

In fact, though, much product innovation in China stays there. A visit to a shop of the Suning Appliance chain, the large Chinese consumer electronics retailer, is telling. There, you might find an Android-enabled television complete with an integrated Internet-browsing capability and preloaded apps that take users straight to some of the most popular Chinese Web sites and digital movie-streaming services. Even the picture quality and industrial design are comparable to those of high-end televisions from South Korean competitors.

We observe the same home-grown innovation in business models. Look, for example, at the online sector, especially Tencent’s QQ instant-messaging service and the Sina Corporation’s microblog, Weibo. These models, unique to China, are generating revenue and growing in ways that have not been duplicated anywhere in the world. QQ’s low, flat-rate pricing and active marketplace for online games generate tremendous value from hundreds of millions of Chinese users.

What’s keeping innovative products and business models confined to China? In general, its market is so large that domestic companies have little incentive to adapt successful products for sale abroad. In many cases, the skills and capabilities of these companies are oriented toward the domestic market, so even if they want to expand globally, they face high hurdles. Many senior executives, for example, are uncomfortable doing business outside their own geography and language. Furthermore, the success of many Chinese models depends on local resources—for example, lower-cost labor, inexpensive land, and access to capital or intellectual property—that are difficult to replicate elsewhere. Take the case of mobile handsets: most Chinese manufacturers would be subject to significant intellectual property–driven licensing fees if they sold their products outside China.

Successes in business to business

Several Chinese B2B sectors are establishing a track record of innovation domestically and globally. The Chinese communications equipment industry, for instance, is a peer of developed-world companies in quality. Market acceptance has expanded well beyond the historical presence in emerging markets to include Europe’s most demanding customers, such as France Télécom and Vodafone.

Pharmaceuticals are another area where China has made big strides. In the 1980s and 1990s, the country was a bit player in the discovery of new chemical entities. By the next decade, however, China’s sophistication had grown dramatically. More than 20 chemical compounds discovered and developed in China are currently undergoing clinical trials.

China’s solar- and wind-power industries are also taking center stage. The country will become the world’s largest market for renewable-energy technology, and it already has some of the sector’s biggest companies, providing critical components for the industry globally. Chinese companies not only enjoy scale advantages but also, in the case of solar, use new manufacturing techniques to improve the efficiency of solar panels.

Success in B2B innovation has benefited greatly from friendly government policies, such as establishing market access barriers; influencing the nature of cross-border collaborations by setting intellectual-property requirements in electric vehicles, high-speed trains, and other segments; and creating domestic-purchasing policies that favor Chinese-made goods and services. Many view these policies as loading the dice in favor of Chinese companies, but multinationals should be prepared for their continued enforcement.

Despite recent setbacks, an interesting example of how the Chinese government has moved to build an industry comes from high-speed rail. Before 2004, China’s efforts to develop it had limited success. Since then, a mix of two policies—encouraging technology transfer from multinationals (in return for market access) and a coordinated R&D-investment effort—has helped China Railways’ high-speed trains to dominate the local industry. The multinationals’ revenue in this sector has remained largely unchanged since the early 2000s.

But it is too simplistic to claim that government support is the only reason China has had some B2B success. The strength of the country’s scientific and technical talent is growing, and local companies increasingly bring real capabilities to the table. What’s more, a number of government-supported innovation efforts have not been successful. Some notable examples include attempts to develop an indigenous 3G telecommunications protocol called TDS-CDMA and to replace the global Wi-Fi standard with a China-only Internet security protocol, WAPI.

Advantage, multinationals?

Simultaneously, multinationals have been shaping China’s innovation landscape by leveraging global assets. Consider, for example, the joint venture between General Motors and the Shanghai Automotive Industry Corporation, which adapted a US minivan (Buick’s GL8) for use in the Chinese market and more recently introduced a version developed in China, for China. The model has proved hugely popular among executives.

In fact, the market for vehicles powered by internal-combustion engines remains dominated by multinationals, despite significant incentives and encouragement from the Chinese government, which had hoped that some domestic automakers would emerge as leaders by now. The continued strength of multinationals indicates how hard it is to break through in industries with 40 or 50 years of intellectual capital. Transferring the skills needed to design and manufacture complex engineering systems has proved a significant challenge requiring mentorship, the right culture, and time.

We are seeing the emergence of similar challenges in electric vehicles, where early indications suggest that the balance is swinging toward the multinationals because of superior product quality. By relying less on purely indigenous innovation, China is trying to make sure the electric-vehicle story has an ending different from that of its telecommunications protocol efforts. The government’s stated aspiration of having more than five million plug-in hybrid and battery electric vehicles on the road by 2020 is heavily supported by a mix of extensive subsidies and tax incentives for local companies, combined with strict market access rules for foreign companies and the creation of new revenue pools through government and public fleet-purchase programs. But the subsidies and incentives may not be enough to overcome the technical challenges of learning to build these vehicles, particularly if multinationals decline to invest with local companies.

Four priorities for innovators in China

There’s no magic formula for innovation—and that goes doubly for China, where the challenges and opportunities facing domestic and multinational players are so different. Some of the priorities we describe here, such as instilling a culture of risk taking and learning, are more pressing for Chinese companies. Others, such as retaining local talent, may be harder for multinationals. Collectively, these priorities include some of the critical variables that will influence which companies lead China’s innovation revolution and how far it goes.

Deeply understanding Chinese customers

Alibaba’s Web-based trading platform, Taobao, is a great example of a product that emerged from deep insights into how customers were underserved and their inability to connect with suppliers, as well as a sophisticated understanding of the Chinese banking system. This dominant marketplace enables thousands of Chinese manufacturers to find and transact with potential customers directly. What looks like a straightforward eBay-like trading platform actually embeds numerous significant innovations to support these transactions, such as an ability to facilitate electronic fund transfers and to account for idiosyncrasies in the national banking system. Taobao wouldn’t have happened without Alibaba’s deep, analytically driven understanding of customers.

Few Chinese companies have the systematic ability to develop a deep understanding of customers’ problems. Domestic players have traditionally had a manufacturing-led focus on reapplying existing business models to deliver products for fast-growing markets. These “push” models will find it increasingly hard to unlock pockets of profitable growth. Shifting from delivery to creation requires more local research and development, as well as the nurturing of more market-driven organizations that can combine insights into detailed Chinese customer preferences with a clear sense of how the local business environment is evolving. Requirements include both research techniques relevant to China and people with the experience to draw out actionable customer insights.

Many multinationals have these capabilities, but unless they have been operating in China for some years, they may well lack the domestic-market knowledge or relationships needed to apply them effectively. The solution—building a true domestic Chinese presence rather than an outpost—sounds obvious, but it’s difficult to carry out without commitment from the top. Too many companies fail by using “fly over” management. But some multinationals appear to be investing the necessary resources; for example, we recently met (separately) with top executives of two big industrial companies who were being transferred from the West to run global R&D organizations from Shanghai. The idea is to be closer to Chinese customers and the network of institutions and universities from which multinationals source talent.

Retaining local talent

China’s universities graduate more than 10,000 science PhDs each year, and increasing numbers of Chinese scientists working overseas are returning home. Multinationals in particular are struggling to tap this inflow of researchers and managers. A recent survey by the executive-recruiting firm Heidrick & Struggles found that 77 percent of the senior executives from multinational companies responding say they have difficulty attracting managers in China, while 91 percent regard employee turnover as their top talent challenge.

Retention is more of an issue for multinationals than for domestic companies, but as big foreign players raise their game, so must local ones. Chinese companies, for example, excel at creating a community-like environment to build loyalty to the institution. That helps keep some employees in place when competing offers arise, but it may not always be enough.

Talented Chinese employees increasingly recognize the benefits of being associated with a well-known foreign brand and like the mentorship and training that foreign companies can provide. So multinationals that commit themselves to developing meaningful career paths for Chinese employees should have a chance in the growing fight with their Chinese competitors for R&D talent. Initiatives might include in-house training courses or apprenticeship programs, perhaps with local universities. General Motors sponsors projects in which professors and engineering departments at leading universities research issues of interest to the automaker. That helps it to develop closer relations with the institutions from which it recruits and to train students before they graduate.

Some multinationals energize Chinese engineers by shifting their roles from serving as capacity in a support of existing global programs to contributing significantly to new innovation thrusts, often aimed at the local market. This approach, increasingly common in the pharma industry, may hold lessons for other kinds of multinationals that have established R&D or innovation centers in China in recent years (read about AstraZeneca’s experience in “Three snapshots of Chinese innovation”). The keys to success include a clear objective— for instance, will activity support global programs or develop China-for-China innovations?—and a clear plan for attracting and retaining the talent needed to staff such centers. Too often, we visit impressive R&D facilities, stocked with the latest equipment, that are almost empty because staffing them has proved difficult.

Instilling a culture of risk taking

Failure is a required element of innovation, but it isn’t the norm in China, where a culture of obedience and adherence to rules prevails in most companies. Breaking or even bending them is not expected and rarely tolerated. To combat these attitudes, companies must find ways to make initiative taking more acceptable and better rewarded.

One approach we found, in a leading solar company, was to transfer risk from individual innovators to teams. Shared accountability and community support made increased risk taking and experimentation safer. The company has used these “innovation work groups” to develop everything from more efficient battery technology to new manufacturing processes. Team-based approaches also have proved effective for some multinationals trying to stimulate initiative taking (read about General Motors’ approach in “Three snapshots of Chinese innovation”).

How fast a culture of innovation takes off varies by industry. We see a much more rapid evolution toward the approach of Western companies in the way Chinese high-tech enterprises learn from their customers and how they apply that learning to create new products made for China (read a perspective on the evolution of its semiconductor sector in “Thee snapshots of Chinese innovation”). That approach is much less common at state-owned enterprises, since they are held back by hierarchical, benchmark-driven cultures.

Promoting collaboration

One area where multinationals currently have an edge is promoting collaboration and the internal collision of ideas, which can yield surprising new insights and business opportunities. In many Chinese companies, traditional organizational and cultural barriers inhibit such exchanges.

Although a lot of these companies have become more professional and adept at delivering products in large volumes, their ability to scale up an organization that can work collaboratively has not kept pace. Their rigorous, linear processes for bringing new products to market ensure rapid commercialization but create too many hand-offs where insights are lost and trade-offs for efficiency are promoted.

One Chinese consumer electronics company has repeatedly tried to improve the way it innovates. Senior management has called for new ideas and sponsored efforts to create new best-in-class processes, while junior engineers have designed high-quality prototypes. Yet the end result continues to be largely undifferentiated, incremental improvements. The biggest reason appears to be a lack of cross-company collaboration and a reliance on processes designed to build and reinforce scale in manufacturing. In effect, the technical and commercial sides of the business don’t cooperate in a way that would allow some potentially winning ideas to reach the market. As Chinese organizations mature, stories like this one may become rarer.

China hasn’t yet experienced a true innovation revolution. It will need time to evolve from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common. The government will play a powerful role in that process, but ultimately it will be the actions of domestic companies and multinationals that dictate the pace of change—and determine who leads it.

Author’s Note: Did Samsung get a fair trial against Apple in Northern California? Can Apple get a fair trial in Korea or China? All interesting questions with potential billion dollar outcomes depending on the answer.

Some in Asia See Bias in U.S. Apple Verdict

By Jessica Seah The Asian Lawyer September 3, 2012

On August 24 a California federal jury awarded Apple Inc. over $1 billion in its smartphone patent infringement suit against Samsung Electronics Co. Ltd.—the largest patent verdict ever. The same day, a Korean court issued a split decision widely seen as more favorable to Samsung, and, last Friday, a Japanese court ruled against Apple outright, ordering the U.S. company to pay Seoul-based Samsung’s legal costs.

The contrast in outcomes has not been lost on intellectual property lawyers in Asia.

“I am surprised Samsung lost all counts in the case in the U.S.,” says one Beijing IP partner with an international firm. “I think there is a clear home court advantage there.”

Other IP lawyers in the region expressed similar sentiments, with some noting that perceptions of bias in the U.S. Apple ruling could provide cover to courts in the region, particularly those in China, that have been accused of favoritism themselves.

“Chinese judges are just getting their heads around whether or not to grant injunctions in patent disputes,” Laight says, “so the result of the Apple-Samsung case may influence how judges see things.”

Many lawyers in the region noted that the U.S. decision was made by a jury. The Korean and Japanese cases were both decided by judges.

The Beijing partner says he found the U.S. ruling less reasonable than the Korean one, in which the three-judge Seoul panel found that both Apple and Samsung infringed each other’s patents and ordered a halt to sales in the country of certain products from both companies. Some observers have said that ruling was more favorable to Samsung because it had already discontinued the affected products.

Apple’s hipper image helped with the California jury, the Beijing partner thinks. Despite being the world’s largest technology manufacturer by revenue, Samsung was the effective underdog in the U.S. case.

“Samsung was pitted against the most revered and successful company in the world,” he says. “So there is definitely a local bias there, especially when decided by jury. I have my doubts against the jury really understanding such a complex case.”

The seven men and two women of the jury found that Samsung infringed all but one of the seven patents at issue—a patent covering the exterior design of the iPad. They also decided that Apple didn’t violate any of the five patents Samsung asserted in the case.

In an interview with Bloomberg, jury foreman Velvin Hogan rejected accusations of local bias. He said the jurors were “inundated” by evidence, and the fact that Apple was headquartered in Cupertino, California—not far from the San Jose courtroom in which the case was heard—made no difference.

In Japan, Apple had claimed that Samsung infringed its patent on synchronization and sought $1.3 million in damages. District Judge Tamotsu Shoji in Tokyo rejected Apple’s claim, though Apple has other infringement claims pending in Japan.

According to Yoshikazu Iwase, an IP partner at Tokyo-based Anderson Mori & Tomotsune, the Japanese court decision was not surprising because “traditionally Japanese judges are conservative in enforcing patents” and local judges are usually “not directly affected by the decisions of other jurisdictions.”

Still, large Asian corporations are generally accustomed to litigating in the United States and have faith in the fairness of the courts there. Though there may be a sense that Apple enjoyed a home-court advantage in San Jose, says Jones Day Tokyo partner Michiku Takahashi, that stops well short of the kind of bias they worry about in China, where courts are not independent and are generally seen as favoring well-connected parties.

“Experienced Japanese companies are not too bothered about court bias, but comparatively they are generally more concerned about decisions made by Chinese courts, than, say, in the U.S. or in Europe,” she says.

Many lawyers believe the Apple-Samsung fight will trigger a wave of new patent litigation targeting big Asian companies. Geoffrey Lin, a Shanghai-based IP partner at Ropes & Gray, says that lawyers will start to go back to look at their clients’ business models to make sure they are closely protected by their patents.

“International technology companies, especially those that manufacture smartphones, are going to start looking at jurisdictions where there is a lot of trolling,” says Lin.

Takahashi says smartphone-related patent litigation has already become common in recent years. “There has been an increasing number of patent troll cases here in Japan, where non [technology] practicing entities are registering smartphone patents,” she says. “So the Apple matter may give even the larger Japanese phone companies more confidence to litigate when they feel their patents have been infringed.”

But Laight says that while the Apple-Samsung case has gotten a lot of attention, the dispute might not be a sole driver for an increase in patent litigation in Asia.

Asian electronics companies from Japan, Korea, and Taiwan have long litigated against each other both in their home jurisdictions and around the world. Laight notes that now Chinese companies are getting in on the act. Last year Shenzhen-based telecommunications firm Huawei Technologies Co. filed patent infringement lawsuits against its smaller Chinese rival ZTE Corp. in courts in France, Germany, and Hungary. The patents relate to data card and 4G technologies, and ZTE has allegedly used Huawei’s trademark on some of its data cards. ZTE has countersued, alleging that Huawei infringed its 4G patents.

SHANGHAI (Reuters) – A fake Apple store in China, made famous by a blog that said even the staff working there didn’t realize it was a bogus outlet, is probably the most audacious example to date of the risks Western companies face in the booming Chinese market.

Few products have captured the imagination of Chinese consumers quite like Apple’s iPhones and iPads. Demand is surging across the country of 1.3 billion people, even hundreds of miles away from the tech giant’s official stores in Beijing and Shanghai.

That marks a huge opportunity for Apple to sell its iconic products, but it also leaves the most valuable brand name in the world vulnerable to the sort of scam perpetrated by the fake store in Kunming, in southwestern Yunnan province.

Complete with the white Apple logo, wooden tables and cheery staff characteristic of real Apple stores worldwide, the Kunming copy left even regular industry watchers startled at the elaborate fake.

“I’m not aware that there have been actual fake stores like that before,” said Bob Poole, vice president of the China operations of the U.S.-China Business Council in Beijing.

“If your products are being sold as fakes, then your reputation goes down and people are going to be less willing to buy. We have to maintain active vigilance.”

Apple has authorized close to a thousand resellers in China to sell its goods. They are required to comply with certain standards and rules on store layout and customer service to get the rights to sell such items as Apple’s iPhones and iPad tablet computers.

The Cupertino, California-based company, which global brands agency Millward Brown says has the world’s most valuable brand worth some $153 billion, has just four official stores in China, two of them in Beijing and two in Shanghai.

In spite of the number of resell outlets, many more copycats have popped up. They often sell real Apple products, obtained from illicit channels, such as smuggling, or through the grey market via Apple agents and distributors.

The blogger who made the store an overnight online sensation said the Kunming store was a “beautiful rip-off” and the salespeople “all genuinely think they work for Apple.”

The bogus store, where staff admitted to Reuters Friday was not an authorized reseller, cuts to the core of the risk big brands take in China.

The widespread unauthorized reselling even of real consumer goods means it is more difficult for companies like Apple to manage their brands and risks undermining their longer-term plans to make inroads into the country.

“It’s becoming more of a problem I think,” said James Roy, a senior analyst with retail consultancy China Market Research in Shanghai.

“A lot of foreign brands are increasingly really seeking to set up a real retail presence in China, not just selling to resellers or through franchisees,” he said.

DIFFERENT FROM PIRACY

That China is a hotbed for piracy is nothing new. Multinational companies have long seen problems such as intellectual property theft and unclear regulations as the price of doing business in the world’s fastest-growing major economy.

The United States and Europe have persistently pressed Beijing to do a better job of enforcing intellectual property rights and stamp out the production of everything from fake DVDs to medicine.

An increasing number of U.S. companies in China say the enforcement of intellectual property rights has deteriorated in the last year, an annual survey by the American Chamber of Commerce in Shanghai released in January showed.

China has said it is cracking down, particularly on piracy, and Western companies have claimed some victories.

This week, Baidu Inc, China’s biggest search engine, agreed with top music studios to distribute licensed songs through its mp3 search service, ending a legal dispute over accusations the company encouraged piracy.

The less-publicized phenomenon of unauthorized vendors setting up shop to peddle real products has grown alongside China’s manufacturing prowess. Many of the factories that produce brand-name goods on contract have been known to do extra runs of the goods to make extra cash, analysts say.

Paul French, chief China analyst at retail consultancy Access Asia, said Apple had two choices to clamp down on fake stores. “One is they either have to police their operations better, or two, they have to sell everything through their own stores and cancel their reseller agreements,” he said.

China’s high import duties on many goods have also encouraged the likes of the fake Apple store in Kunming, analysts suggest.

Shop owners can buy everything from computers to cosmetics at significantly lower prices overseas, smuggle them into the country, and undercut the prices of official Chinese retailers.

Vendors often turn to Chinese students studying abroad to buy products in the United States, Hong Kong, Australia and other countries.

Internet “bulletin boards” are full of advertisements soliciting interested parties, who can earn 100-200 yuan ($15-30) in fees per iPhone or iPad they manage to sneak past customs agents when returning home for the summer or winter break.

LOSS OF CONTROL

At first glance, it might appear that companies would not mind having their products bought in other countries or obtained through other means and resold in China through resellers, as it helps drive sales but with less expense and hassle over customer service.

After all, building up a retail presence in a country as vast as China takes time and is expensive. That’s why many companies have sought to expand their presence through licensees. The problem is, any negative experiences customers have with service at unauthorized resellers can backfire on the brand because customers relate their disappointment with the product. “People might have a bad experience, they might blame the brand,” said Roy.

Many Western brands are now opting to take back control of their operations. It may mean a more measured pace of expansion, but it gives a company greater control. Starbucks last month took back control of its retail stores in southern China, having worked in the past through a joint venture.

While the issue of unauthorized retailers has not yet garnered the same attention as piracy, China has made efforts to crack down on such activities, stepping up screening to try to catch smugglers. But if Beijing’s track record with combating piracy is any guide, analysts say, it is unlikely that fake stores — Apple or otherwise — will be stamped out anytime soon.

“China has very low penalties. It’s almost considered a good business deal to get caught, then move and set up shop again,” said Poole of the U.S.-China Business Council.

Sports personalities and promoters can turn to the Asian Domain Name Dispute Resolution Centre (ADNDRC) for dispute resolution services regarding domain names that are claimed to infringe registered trademarks. Other remedies available to them include those pursuant to personality rights law in China, or passing off and trademark law in Hong Kong.

The Asian Domain Name Dispute Resolution Centre (ADNDRC) was formed as a joint undertaking by the China International Economic and Trade Arbitration Commission, Hong Kong International Arbitration Centre and the Korean Internet Address Dispute Resolution Committee. It was subsequently approved by the Internet Corporation for Assigned Names and Numbers (ICANN) to provide dispute resolution services in regard to Asian generic top level domain names (gTLD’s), under the Uniform Domain Name Dispute Resolution Policy(UDRP).The ADNDRC may delete or transfer the domain name under paragraph 4 UDRP if the domain name is confusingly similar to the trademark; the domain name holder had no legitimate interest; and the domain name was registered or used in bad faith.

In Telstra Corporation Limited v. Domain-Broker-Labs, Case No.D2000-1789, the complainants, Australia’s leading information services company, entered into a strategic Pan-Asian Alliance with Pacific Century CyberWorks, a leading Asian communications company. They sued for and obtained transfer of the Asian respondent’s domain name, registered shortly after conclusion of the Alliance, on the grounds that the respondent did not carry on any related business, was not commonly known by any similar name, and did not act in good faith.

The panel in that case held that “given the [claimant’s] reputation and goodwill in the TELSTRA PCCW name and the public announcement which… featured…prominently in South East Asia, it is hard to see how the respondent can claim to have registered the name in good faith.… [given] the lack of any adequate explanation or the denial of bad faith….”

In Advance Magazine Publishers v. Shenzhen Hengtaixin Golf Utilities, CIETAC CND-200300007, respondent registered the domain name golfdigest.com.cn to provide information services concerning golf. The complainant was the owner of the trademark GOLF DIGEST for print publications in China. Article 11 of the Chinese Trademark Law and Article 49 of the Implementing Regulations of the Trademark Law provide that trademarks referring to the quality, quantity, or other features of goods may not be registered, and there is no right to prohibit others from using these terms normally. The panel ruled that the complainant could not register the trademark for information services on golf and was limited to print publications and similar goods; consequently, there was no right to prevent the respondent’s normal use of the descriptive term in its domain name.

In Alibaba (China) Network Tech., Ltd. v. Jichuang Power Group Co., CIETAC CND-2003000024, the China Internet Network Information Centre (‘CNNIC’), China’s official domain names regulator and administrators of .cn TLD, refused the application of Beijing Zhengpu Science Development Company for the Chinese name ‘Alibaba’ on the grounds that the domain was reserved for a well-known Hong-Kong based online business-to-business marketplace, Alibaba.com Corporation. A Beijing Intermediate People’s Court ruled that CNNIC did not have the right to reserve Chinese domain names for well-known companies and ordered them to treat all domain applicants equally.

Are there any other sources of protection for domain names infringing identity rights of sports personalities in China?

Article 99(2) of the General Principles of the Civil Law guarantees legal persons the right to exclusive use of their personal names. Article 120 provides, that if a legal person’s “name, portrait, reputation or honor is infringed upon, he shall have the right to demand that the infringement be stopped, his reputation rehabilitated, the ill effects eliminated and an apology made; he may also demand compensation for losses.”

How have the above legal protections been applied in practice?

In Shanghai Shenhua Football Club v. Shanghai Teleitong Trade, Gazette of the Supreme Court, vol. 69, no.1 (2001), the defendant used the name of the plaintiff, a Chinese national football champion in an advertisement. The court held that the defendants were using the plaintiff’s identity to pursue commercial interests and required authorization for doing so.In 2004, a Fujian company registered the domain names of China’s gold medalists in the Athens Olympics,, without their authorization. After a public outcry, the company gave up the domain names.

In the run-up to the Beijing Olympics, China’s General Administration of Sport preregistered most of the names of China’s Olympic athletes, giving away the domain names to the country’s gold medalists as a gift. The rest of the domain names were returned following an appeal by the CNNIC.

Is the law the same in Hong Kong?

The Hong Kong Bill of Rights Ordinance protects private individuals from invasions of privacy by the government and public authorities, but not by private persons or organizations. Sports personalities have to rely on the UDRP, reinforced by passing off and trade mark law, in order to obtain protection against infringement for their identities.

First off, we never knew that China had a government agency called the National Office of Eliminating Pornography and Illegal Publications. But it sounds about right.

Secondly, we would loved to have been a David Cronenberg fly on the wall at today’s DVD destruction as reported by LA Times Beijing correspondent Barbara Demick. Apparently, the Beijing affair was one of 31 such events held across the country today to show that China is serious about not permanently pissing off Hollywood. Writes Demick:

As the music switched from jazz to a marching anthem, officials filed onto a red-carpeted stage. In front of them were the condemned: thousands of pirated DVDs, most of them Hollywood fare, with Raging Bull, Kill Bill, Alvin and the Chipmunks, and Jaws visible on top. Riot police in helmets stood guard.

After a few speeches, the officials donned white rubber gloves and protective goggles and took their place behind machines resembling wood chippers. The police handed them bins filled with DVDs that the officials fed a few at a time into the machines, which with a terrific noise spit out slivers of polycarbonate plastic.

Chinese officials tell Demick a total of 26 million pirated DVDs were earmarked for destruction nationwide, while the operator of a Beijing pirated DVD store says three-quarters of such establishments have closed and that his days also seem to be inevitably numbered.

BEIJING (AP) — Chinese authorities have arrested 3,001 people in their latest crackdown on rampant product piracy and seized fake or counterfeit medicines, liquor, mobile phones and other goods, officials said Sunday.

The campaign launched in October comes as Beijing faces pressure from the United States and other trading partners to stamp out product copying. China is a leading soure of fake goods despite repeated crackdowns, but Chinese officials have promised the latest enforcement will produce lasting results.

Communist leaders have given the new crackdown special prominence, publicly linking it to efforts to transform China from a low-cost factory to a creator of profitable technology by nurturing companies in software and other fields. China’s fledgling software, music and other creative companies have been devastated by unlicensed copying.

“Intellectual property protection is essential for building an innovation-oriented country and achieving a shift from `China manufactured’ to `China innovated,'” Li Chenggang, deputy director of the Commerce Ministry‘s law department, said at a news conference. He was joined by officials of China’s commerce, intellectual property and other agencies.

Trade groups say illegal Chinese copying of music, designer clothing and other goods costs legitimate producers billions of dollars a year in lost potential sales. The American Chamber of Commerce in China says 70 percent of its member companies consider Beijing’s enforcement of patents, trademarks and copyrights ineffective.

Businesspeople have expressed optimism about the latest effort because a rising Communist Party star, Vice Premier Wang Qishan, has been put in charge and an enforcement office set up in the Commerce Ministry.

A report distributed at Sunday’s news conference said that goods seized in the latest crackdown include 26,000 mobile phones, some with phony Nokia and Apple labels, copies of Louis Vuitton bags and Rolex watches, automotive components, DVDs and clothing.

It said authorities shut down 292 websites selling counterfeit and fake goods.

Also Sunday, the official Xinhua News Agency said 23 people accused of producing fake medicine were detained in the central city of Jingzhou in Hubei province. It said they made more than 100 million capsules filled with sawdust and wheat flour and sold under the brand names of 201 different types of medication.

Xinhua said the medicines were sold by mail and over the Internet but gave no details of whether anyone was injured or which brand names were counterfeited.

Piracy is especially sensitive at a time when Washington and other Western governments are trying to create jobs by boosting exports. In 2009, the World Trade Organization upheld a U.S. complaint that Beijing was violating trade commitments by failing to root out the problem.

Rampant copying also has hampered Beijing’s efforts to attract technology industries because businesspeople say companies are reluctant to do high-level research in China or bring in advanced designs for fear of theft.